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Finance

Should You Buy the Dip in Jumia Technologies?

Known as the ‘Amazon of Africa,’ Jumia Technologies AG’s (JMIA) stock hit a $69.89 all-time high  on February 10, but it has lost 56.4 % over the past three months and 27.9% over the past month. It witnessed a decline in March due to a broader market rotation out of expensive growth stocks. However, the Germany-based company completed an ’at the market’ offering on March 30, which generated $348.6 million in gross proceeds. JMIA  plans to use the funds for general corporate purposes.

The company’s revenue declined in the fourth quarter (ended December 31, 2020) even though more than 1.5 billion consumers visited its page during a Black Friday event held in November 2020. It had also partnered with established companies including Standard Chartered and Samsung, but this has not helped it generate significant revenues.

Given volatile markets  in Africa currently, we think JMIA might need a significant time to recover its revenues.

Here’s what we think could shape JMIA’s performance in the near term:

Africa’s Infrastructure is Not Yet Conducive for Rapid E-Commerce Growth

There is broad agreement that there is huge, untapped potential in Africa with respect to growth of e-commerce. However, several operators have avoided the continent due to its poor infrastructure. Cases of internet shutdowns have also been rising in Africa. For example, Tanzania restricted access to the internet and social media applications during its elections in October 2020.

Furthermore,  the cost of high-speed internet connectivity in Africa is high. To top that, Uganda introduced a 12% tax on internet data on April 30, 2021. JMIA has been impacted by several such measures taken by authorities in the past. For example, it  had to close its operations in Cameroon, Tanzania and Rwanda in 2019 because they  were  not generating sufficient returns. Absent drastic changes, the company is expected to continue facing hurdles in Africa.

Weak Financials

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JIMA’s  revenue declined 15.3% year-over-year to $50.78 million for its fiscal 2020 fourth quarter, ended December 31. JMIA attributes the decline to its transition to  an asset light marketplace model. However, its orders also declined 2.6% year-over-year to 8.1 million in the quarter on the back of a 14% year-over-year decrease in digital services transactions on the JumiaPay app. Its GMV for the quarter came in at $281.01 million, down 21.1% year-over-year. Moreover, its loss for the period was  $56.74 million compared to $77.69 million in the prior-year period.

Stretched Valuation

In terms of forward EV/Sales, JMIA’s 11.34x is 567.1% higher than the1.70x industry average. In terms of forward P/S ratio, the stock’s 13.15x is 748.4% higher than the 1.55x industry average. Its forward price-to-book ratio of 19.14x is higher than the 3.87x  industry average.

Consensus Price Target Indicates Downside

JMIA closed Friday’s trading session at $26.67 and Wall Street analysts expect the stock to hit $14.07 in the near term, which indicates a potential decline of 47.2%.

POWR Ratings Reflect Bleak Prospects

JMIA has an overall F rating, which equates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. JMIA has a F grade for Value, in sync with its higher-than-industry valuation ratios. It has a F grade for Sentiment as well, consistent with unfavorable analyst sentiment.

The stock has a D grade for Quality. This is justified given that its trailing-12-month return on common equity and trailing-12-month return on total assets are negative compared to industry averages of 7.7% and 2.6%, respectively. It also has a D grade for Stability as well.

JMIA is ranked #68 out of 71 stocks in the F-rated Internet industry. Click here to access JMIA’s ratings for Growth and Momentum as well.

Better than JMIA: Click here to access seven top-rated stocks in the same industry.

Bottom Line

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Since Africa’s e-commerce market is  relatively  untapped, JMIA could generate massive returns in the long run if it can  deal with the challenges related to the country’s infrastructure. However, the potential benefits that could accrue to it for the continent’s untapped market seem unlikely in the near-term given Africa’s economic volatility coupled with JMIA’s weak financials. Its sky-high valuations are also not in sync with its growth prospects. Analysts expect its EPS to remain negative in fiscal 2021 and fiscal 2022. So, it’s best to avoid the stock now.

 


JMIA shares were trading at $23.97 per share on Monday morning, down $2.70 (-10.12%). Year-to-date, JMIA has declined -40.59%, versus a 13.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More…

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